Former officials argue that the DOJ investigation endangers the Federal Reserve's autonomy and believe it 'should not occur in the United States'

Leading Economists Rally Behind Powell Amid DOJ Probe

A group of distinguished former Federal Reserve leaders, ex-Treasury secretaries, and renowned economists publicly voiced their backing for Fed Chair Jerome Powell on Monday, expressing deep concern over the Justice Department’s potential criminal case against the central bank.

In a joint statement, signed by previous Fed Chairs Janet Yellen, Ben Bernanke, and Alan Greenspan, along with four former Treasury secretaries from both major political parties, they condemned the investigation as an extraordinary effort to erode the Fed’s autonomy. “Such a criminal probe into Chair Powell represents an unprecedented prosecutorial attack on the Federal Reserve’s independence,” the statement read.

The signatories warned that this approach mirrors practices seen in countries with fragile institutions, often resulting in runaway inflation and economic instability. “This kind of interference is foreign to the United States, where the rule of law underpins our economic prosperity,” they emphasized.

Speaking to CNBC, Yellen described the probe as a serious threat to the Fed’s independence, warning that the situation should be of greater concern to financial markets, which she called “deeply unsettling.”

Early Monday trading reflected market unease, with stock prices fluctuating. The dollar, Treasury yields, and US equity futures all dipped slightly in response to the news.

Potential Fallout for Trump and the Economy

Wilmer Stith, a senior bond portfolio manager at Wilmington Trust, cautioned that bond yields could climb higher, making borrowing more expensive for consumers—particularly those seeking mortgages. This could offset any benefits from Fannie Mae and Freddie Mac’s $200 billion mortgage bond purchase.

“President Trump is undermining his own efforts to lower mortgage rates and help first-time buyers afford homes,” Stith remarked.

He further warned that doubts about the Fed’s independence and its resolve to fight inflation could push yields even higher, as investors demand greater compensation for potential losses in principal.

Some experts argue that Trump’s use of criminal subpoenas to pressure the Fed could make it increasingly difficult for future Fed chairs to convince markets and the public of the central bank’s independence, potentially complicating efforts to manage inflation expectations.

Krishna Guha, who leads global policy and central banking strategy at Evercore ISI, predicted that the investigation would strengthen unity within the Fed around Powell while isolating Trump’s eventual nominee for Fed chair.

Guha believes these dynamics could result in Powell remaining on the Fed’s board as a governor, “preventing the new chair from securing a natural majority and jeopardizing hopes that the previous Committee would cooperate with the incoming leadership.”

Rate Cuts and Market Uncertainty

This latest development also diminishes the likelihood of interest rate reductions—one of Trump’s primary objectives.

“This situation creates the worst possible scenario for Trump and the markets: increased inflation risk, greater uncertainty over monetary policy, and a lower chance of swift rate cuts, as the existing FOMC is more likely to resist or delay the new chair’s initiatives from June onward,” Guha explained.

Esther George, former president of the Kansas City Fed, expressed her concern over the mounting pressure and intimidation directed at the central bank.

“Such tactics not only hinder the Fed’s ability to fulfill its congressional mandates but also erode confidence in the United States,” George stated.

Impact on Fed Leadership and Senate Confirmation

The ongoing legal threat may also reduce the chances that Trump’s pick for the next Fed Chair—potentially Kevin Hassett, Kevin Warsh, or Christopher Waller—will be confirmed by the Senate before Powell’s term concludes in early May.

Republican Senator Thom Tillis, a member of the Senate Banking Committee, has already pledged to oppose any Fed nominee’s confirmation until the legal dispute is resolved. Senator Lisa Murkowski of Alaska echoed Tillis’s concerns and voiced her own alarm over the investigation.

Paul Ashworth, chief economist for North America at Capital Economics, noted that if the confirmation process stalls and Trump cannot appoint a replacement in time, the Fed board would likely vote to keep Powell as acting chair.

Ashworth also suggested that if the Justice Department proceeds with prosecution, Powell would probably remain on the Fed board even after his chairmanship ends, as his board term runs until 2028.

“This would limit Trump’s ability to fill the Board with his own appointees,” Ashworth said. “Even if the Supreme Court allowed Trump to dismiss Lisa Cook for ‘mortgage fraud,’ he would still only have his new chair and perhaps one other ally, likely Stephen Miran.”